Views on the oil and gas industry’s willingness and ability to decarbonize are rife with doubt. Those pushing institutions to divest from fossil fuels, for example, often argue that the sector is more likely to eventually face financial default than make the adaptations necessitated by the climate crisis.
But research from two Columbia professors, presented at Columbia Business School’s 2022 Climate Business and Investment Conference, hosted by the Tamer Center for Social Enterprise and Columbia Climate School, points to new findings that complicate this picture.
Work by Shivaram Rajgopal, the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School, and separate research by Luisa Palacios, senior research scholar at Columbia’s Center on Global Energy Policy, suggest that, increasingly, oil and gas majors can be influenced by their investor stakeholders.
Rajgopal’s multifaceted research project investigated patterns around the carbon reduction pledges from U.S.-based, publicly listed, exploration- and production-focused oil and gas companies. Alongside coauthors Hemang Desai, Pauline Lam, and Bin Li, Rajgopal identified the companies in the industry that are most likely to make net zero or reduction commitments—and what happens in the market, if anything, when they do so.
Notably, he found that the likelihood of a carbon pledge increases alongside the size of the ownership share of behemoth investor BlackRock, whose CEO, Larry Fink, has been a loud and consistent advocate of stronger corporate climate disclosure and accountability. In other words, a powerful investor who is vocal about the climate actions they expect from their portfolio companies does appear to exert influence on oil and gas majors, according to Rajgopal.
Further strengthening this message is Rajgopal’s separate finding concerning the impact of Engine No. 1, the activist investor that successfully managed to install three directors on Exxon’s board as part of a strategy to push the energy company to reduce its carbon output. Engine No. 1’s victory was like an “earthquake” in the industry, Rajgopal said—and his research bears that out: The oil and gas companies in his sample were statistically more likely to issue carbon pledges after Engine No. 1’s success.
But are carbon pledges from the oil and gas industry credible, at least in the eyes of the stock market? Rajgopal found that the pledges yield little to no stock price reaction, raising questions about whether the market views such commitments as little more than cheap talk. However, his findings offer an important caveat on this point: As the quality and specificity of commitments improve, investors appear much more likely to take notice.
Still, the wider context in which all these actors operate is evolving quickly, Rajgopal stressed, noting that another finding concerning the result of Engine No. 1 underlines this: On the day Engine No. 1 proposed its first slate of Exxon directors in late January 2021, the non-pledgees in his sample suffered a large negative market reaction relative to those that had already made carbon pledges. As more such events happen, the market punishments of inaction on climate may grow harsher.
“Why are the non-pledgees getting hit? We can hypothesize that if you’re a pledgee, then you’re seen as a better company, or the market is thinking that Engine No. 1 is just the beginning of these green-activism-type hedge funds going after these companies,” Rajgopal explained. “We haven’t yet fully understood why we see that reaction, but the fact that it’s happening I think is quite interesting.”
Rajgopal acknowledged that his research focused on a narrow—though important—subset of the oil and gas sector. It remains important to ask: Is the behavior of the world’s state-owned oil companies shifting at all as calls for climate progress intensify?
A powerful investor who is vocal about the climate actions they expect from their portfolio companies does appear to exert influence on oil and gas majors. Shivaram Rajgopal, professor, Columbia Business School
Palacios has been tracking the answers to this precise question and presented her preliminary findings at the conference.
Palacios, the first woman to chair Citgo’s board of directors and a former energy researcher at various research organizations and investment banks, stressed that national oil companies are a crucial group to keep an eye on, given that they account for half of the world’s oil production—a share that is likely to increase.
“I believe that the very difficult equation of funding the energy transition has to include having national oil companies on board,” she said, adding that they tend to stand out in terms of having the balance sheets to finance these types of investments.
In line with Rajgopal, Palacios said she found a correlation between state-owned oil and gas companies’ reliance on the international finance market and their likelihood to issue environmental, social, and governance reports and offer transparency about their ESG metrics. In other words, they are not exempt from heeding international investors’ demands regarding climate disclosures.
She said she is also seeing promising indications that some of the companies she is tracking are indeed using their balance sheets to fund decarbonization efforts, presumably as they look ahead with an eye toward “wanting to be the last one standing.”
“They understand that they need to prove that their oil is as decarbonized as possible,” Palacios said.
About the Researcher
Shivaram Rajgopal
Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing, Accounting Division